This is a very big question being asked today throughout Greater Vancouver. Some parties are calling

for anti-speculative measures such as large tax penalties for non-resident buyers of multiple properties.

For many readers this may sound like too much government but let’s consider some of the facts...

 

 

By Rory Sutter,

Special to The Post 

 

Whether you live in Richmond or Vancouver you can’t help but wonder if the local person is being driven out of the market for higher end homes and large frontage redevelopment lots. The bidding wars with Chinese buyers have not involved locals apart from some greedy builders hoping to cash in on this market anomaly.

Since 2010 China has being trying to curb property speculation and land hoarding as prices soar there. Some observers suggest that they now have a property bubble waiting to pop. Case-in-point; the development in 2006 of an English themed town in Shanghai’s “One City, Nine Towns” master plan that quickly sold out.

Today most of the completed properties remain unoccupied and the suburb feels like a ghost town apart from the newlyweds who go there to take wedding photos at what looks like the world’s largest movie set.

It has been estimated that there are more than 64.5 million houses lying vacant in China’s urban areas that were bought by people counting on a constantly rising property market. They didn’t buy to live in their properties and have no intention of becoming landlords.

Mr. Yi Xianrong, an economist at the Chinese Academy of Social Sciences noted in 2010, “If this outsized property bubble does not burst, it will hurt residents’ well-being, and also affect our national security and coordinated national development. In his opinion the over-heated property market was misallocating resources, distorting prices and squandering the wealth created by economic growth.

Be sure that the Chinese government is trying to prevent a meltdown just like the Japanese did with their reactors at the Fukushima Daiichi complex. Instead of applying water they have raised downpayments requirements to 60% for second homes, increased mortgage rates, allowed cities to charge property taxes and instituted transaction taxes.

In Beijing property values have surged 42% in one year and the government has instituted 15 new anti-speculative measures including a regulation the requires non-permanent residents to provide tax and social insurance certificates of five years or more to purchase their limit of one home.

As the government cracks down on speculators in China and fears grow related to a bubble is it fair to suggest that many investors are now moving to new fishing grounds such as Metro-Vancouver? There’s no question that our market is ripe for manipulation. Vancouver has experienced double-digit market growth for several years and is stable. Compared to China and Hong Kong it is affordable and foreign real estate offers diversification.

We have no restrictions on foreign investment here. In fact, if you agree to lend our government $800,000 for five years we will throw in a Canadian passport and the program allows applicants to finance most of their investment through designated banking institutions. Compared to millions of speculators in China there’s little competition here and the locals are happy to sell their properties to the highest bidder (take the money and run).

There are no limits on the number of properties that non-residents can purchase and our government doesn’t care if all of them sit empty. Worst-case as new Chinese speculators hear about the spectacular fishing in Vancouver and encounter stringent restrictions in China they will come to the party later and purchase from the original speculators. Or they can simply acquire a portfolio of properties and resell them overseas to other buyers hungry for a quick flip.

What’s missing in this picture? The local population! We are sitting on the sidelines watching foreign nationals, with no intention of living here, and some new investor class immigrants from China play a game on our soil with no rules or referees and they don’t even need us to play apart from selling our properties. The problem is that once the locals leave the game by selling their property, it will get harder to come back in with rising prices and we are now seeing huge demographic shifts within Vancouver’s West Side and Richmond and it is moving out to other areas of Metro-Vancouver.

Is there any wonder that our home prices now exceed New York and London? But the greater question is can we afford to allow this to continue? Extreme gains are unhealthy in China and they are growing to unhealthy levels here. The experts will tell you that Chinese investment in Vancouver is not an economic fundamental, it is simply not sustainable. At some point this international bubble is going to burst and it will affect every property owner.

It’s not just happening in the residential sector, one of my friends noted that he just had an unsolicited offer from a Mainland Chinese buyer for one of his commercial investment properties at a price that equates to a 3.5% capitalization rate. The challenge is where does he reinvest the proceeds? It’s not as easy as it sounds if you want your money to stay in Metro-Vancouver by acquiring a similar asset.

One significant consequence of all this speculation/investment is the growing unaffordability of our housing. Interestingly Chinese investment affects the top three most severely unaffordable world real estate markets. Vancouver was ranked #2 in 2011 with the average home costing 10.6 times Vancouver’s median household income (up from 9.5 times in 2010). Sydney Australia is ranked #3 with the average home costing 9.2 times their median household income (down from 9.6 times in 2010).

Australia receives more than 70,000 Chinese investor-class immigrants each year and Chinese buyers are snapping up some of the best luxury properties in Sydney including big homes on the harbor and new condominium projects. Hong Kong is #1 with the average home costing 12.6 times their median household income (up from 11.4 times in 2010). All these cities attract significant Chinese investment and in one year Vancouver has moved to second position over Sydney for the most severely unaffordable market at a rate of growth similar to Hong Kong. There is no question that Vancouver continues to be on the forefront of the Chinese radar. 

So the next time you see a photo of buyers from China stepping off a helicopter (sponsored by a local real estate marketing firm) in West Vancouver or White Rock, surrounded by paparazzi like rock stars as they each gobble up five, ten, or twenty homes; recognize that these properties may be back on the market in a few days for 10% – 30% more than their purchase price, or they may be sitting empty for months, or could be featured in Shanghai or Beijing to hungry speculators or investor class immigrants.

Unfortunately the question of whether Mainland Chinese buyers are hurting our market can not be answered today with complete certainty, some say that they are helping to sustain our market, but there is no question that the game has changed here and there could be serious long-term consequences in the future as a result of some of the speculatory practices taking place.

 

Rory Sutter has been a highly regarded real estate professional, advisor, writer, and speaker for more than twenty years. He has been involved in the development and sale of more than 2000 homes, condominiums and townhouses. Rory carries the Associate Broker’s license designation and works with Sutton Group – Seafair Realty. For more on Rory go to www.vancouverrealestateupdate.com or email him at rory@rorysutter.com.